New rules mean mutual fund advisors must prove their value add

By Susan Yellin | May 13 2014 02:31PM

As rules regarding transparency and disclosure of fees start to come into clearer focus, mutual fund advisors and dealers will have to find ways of proving their value-add to their clients, a conference was told.
Laura Paglia, a partner with Borden Ladner Gervais LLP, told the Federation of Mutual Fund Dealers’ Conference in Toronto in late April, that advisors will come under increasing pressure to justify their value once the rules for CRM2 become effective. CRM2, the regulatory initiative that aims to enhance cost disclosure and performance reporting, is being adopted in phases – July 15, 2014, July 15, 2015 and July 15, 2016.

“It’s all about [disclosing] fees,” said Paglia. “A lot of advisors may be asking themselves these days whether they will have to do more for less and are searching for value-add activities to show their clients that the fees really are worth it.”

Paglia said clients can anticipate more status reports from advisors – through regular mail, social media and more client seminars. All of these come with their own set of regulatory requirements which, in turn, will put more onus on branch managers and compliance professionals.

Fee complaints

At the same time, Paglia wondered aloud whether there will be more requests for fee rebates to avoid complaints and maintain client relationships. “Then there’s the corollary: can we expect to see an increase in complaints about fees? A cluster of complaints about fees either on a per dealer or per advisor basis will in all likelihood get the attention of the MFDA and may lead to an investigation. This could all lead to increased regulatory scrutiny.”

On the sensitive issue of removing embedded commissions, Patti Best, senior vice president, Client Experience at Mackenzie Investments, said she’s heard from advisors and dealers that staying in the embedded model has some positive effects, including that there are some clients who want to have advice costs bundled and that they like knowing the return they earn is net of any costs. Some also believe, said Best, that regulatory moves for greater fee disclosure through CRM will be a first great step in providing greater transparency.

On the flip side, many believe that the trend to unbundle fees that started in the United Kingdom and Australia will eventually take place in Canada and many advisors believe they might just as well start now, Best said. Some also argue that a fee-for-service model puts mutual fund advisors on the same professional footing as lawyers and accountants.

But more than that, said John Webster, president, CCO and Director at Queensbury Securities Inc., CRM and the issue of unbundling fees in favour of fee-for-service will have a major impact on the image of advisors and the mutual fund industry in total.

“I think it will make advisors accountable and right now they are not accountable,” said Webster. “They are going to have to stand up in front of their clients and say: ‘Here is what I did to earn that [fee]’. And overall, I think that’s positive for the industry.”